Not only is the end of the year reserved for holidays and quality time with family and friends, but it is also the time of year for year-end tax planning. Although there have been few changes in tax law for the 2022 tax year, there are still numerous strategies that can be implemented to help reduce tax liabilities as we approach the end of the year:
Accelerated Depreciation: Currently, assets such as leasehold improvements, equipment, and furniture can be fully expensed for income tax purposes in the year they are placed in service. It is advantageous to place assets in service during 2022 as the deduction is reduced to 80% of the value of the asset (with the remainder depreciated) started in 2023. Placing assets into service by the end of 2022 will help to decrease taxable income and preserve cash.
Employee Retention Tax Credits: Many restaurants have already taken advantage of the Employee Retention Tax Credits which is a wage-based refundable credit for wages paid during Q2 2020 through Q3 2021. The credit is for businesses that had a revenue decline in 2020 or 2021, relative to 2019, or experienced an impact due to government shutdown orders. If you are a restaurant and have not taken advantage of the credit, your eligibility should be explored to claim the refundable credits you are entitled to.
Employment Credits: The Work Opportunity Tax Credit (“WOTC”) and Empowerment Zone Credits (“EZ”) are wages-based credits for employees who meet certain criteria (i.e. residence, food stamp recipients, veteran, and ex-felons, to name a few). The amount is driven by the amount of wages paid to eligible employees and is set to expire on December 31, 2025. You must have a process in place to screen eligible employees before claiming the credit. If you are not claiming the credits, consider evaluating the credit as it can yield significant credit amounts in high-turnover businesses such as restaurants.
Pass-through Entity Taxes: Approximately thirty-five states have enacted elective entity-level taxes for pass-through entities. Although an elective tax may sound like a not so wise choice, the taxes provide a benefit as they allow state taxes to be deducted at the entity level rather than at the owner level where the deduction may be limited in amount. The result is an increased federal income tax deduction and a state tax impact that is typically tax neutral. If you operate in a state which has an elective pass-through entity tax in place, you should evaluate if you should take advantage of this to drive lower taxable income for the owners.
Start Planning for Known Law Changes: Many favorable tax provisions such as the Qualified Business Income (“QBI”) deduction and decreased individual income tax rates are scheduled to expire on December 31, 2025. Although this is three years away, owners should begin considering these law changes when evaluating capital expenditures, exit transactions, or any other tax strategy which has an opportunity to defer the recognition of expense or accelerate the recognition of income. Being proactive in managing known changes in tax law can manage significant benefits in the long term.
Tax planning is essential for businesses looking to optimize cash flow while minimizing their total tax liability over the long term. Contact your GBQ engagement team or Ryan Kilpatrick to discuss any of these year-end tax-saving strategies.
Article written by:
Ryan Kilpatrick, CPA